The recovery from the Great Recession has been slow and unsteady. Two years after unemployment peaked at 10.1%, it still remains over 9%, in contrast to the under 5% in 2007. GDP has grown very slowly during the past year, and is now more than 10% below its potential level. President Obama is rightly concerned about the large number of Americans who are unemployed, especially the longer term unemployed-those who have been without jobs for over six months. How successful will his proposed American Jobs Act be in getting the economy moving forward at a much faster clip?
Boiled down to its essentials, the proposed Jobs Act is a second stimulus package since most of the spending is supposed to take place soon (before the end of 2012), while it will be financed over the next ten years in ways that are unclear. At an estimated approximately $450 billion, this package is much smaller than the first stimulus package in 2009 that cost about $800 billion. The proposed structure is better than the first one since it relies more on tax cuts and direct subsidies to households: about 2/3 of the proposed spending comes from a temporary cut in (payroll) taxes and increases in benefits to the long term unemployed.
I am less negative on the extension of unemployment benefits than is Posner. I agree it will encourage some of the longer term unemployed to stop searching for jobs since they could then receive these extended benefits. On the other hand, an extension helps insure workers against long-term unemployment, which is the most difficult form of unemployment to finance out of own savings and borrowing. In an economy with a very slow recovery, extending unemployment benefits tailored to long-term unemployment may be sensible, although it is not an easy call.
The cut in payroll taxes is supposed to have two positive effects on the economy. It would temporarily reduce the cost of labor to companies and thereby encourage them to hire more workers, and it would increase the spending of workers through increasing their take home pay. Such temporary cuts in wage costs to employers will increase employment only a little, and it will be mainly for low skilled low wage jobs that can be easily eliminated after the cuts expire. Since spending by households responds much more to their long term income prospects than to short run changes in their incomes, households would tend to save rather than spend most of their higher incomes due to a temporary cut in social security taxes. Therefore, the employment bang for the buck will be small per dollar of tax cut.
Further lowering, and possibly reversing the sign, of any positive stimulus to the economy from a temporary tax cut and extension of unemployment benefits is that they must eventually be paid for: either through future higher taxes, lower government spending, or greater inflation (the inflation “tax” in the language of economists). These effects may not be fully anticipated, but surely businessmen and households who are making long-term investments will pay attention to future taxes and future government spending as well as to their present levels.
Most of the remainder of the president’s jobs plan is the $90 billion that will help finance infrastructure projects. While many infrastructure projects in the US might well have high benefit/cost ratios, it is doubtful whether these will be the projects selected by the political process. The president was well aware of this in his speech when he said he wanted “no more bridges to nowhere”, but I see no reason why this time will be different than much of America’s recent history on federal-supported infrastructure projects.
This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States. The president partly addressed these concerns by calling for passage of the stalled free trade acts with Panama, Colombia, and South Korea, supporting patent reform, and advocating lower taxes on corporations. At the same time, however, he also raised concerns about the future economic environment by his proposed sizable increase in federal spending that would further weaken the fiscal position of the federal government.
The net effect on the short and long term health of the economy will depend on whether Congress supports those aspects that will improve the environment faced by households and businesses rather than the more prominent proposals that are likely to further weaken the economy.
Becker gets it right. The Obama Administration's current economic stimulus proposal is a short-term Band-Aid that amounts to doing something for the sake of being able to claim that something is being done. After the blowout Obama deficits of the last three years, no sentient person can buy this scam.
Posted by: TANSTAAFL | 09/11/2011 at 07:13 PM
Becker's arguments are on the mark, but the title of his blog post is misleading. This would be the THIRD stimulus act (the second during the Obama administration) for the current economy. The first was during the last year of the Bush administration and it took the form of tax refunds.
The proposed stimulus will likely be (if it passes Congress) a third failure even if it is a political success and saves a few jobs in the Obama administration.
Posted by: Mitchell Khong | 09/11/2011 at 08:06 PM
Obama is a dingbat whose only strategy is to waste money in ever increasing quantities.
Posted by: Mogden | 09/11/2011 at 10:55 PM
"In an economy with a very slow recovery, extending unemployment benefits tailored to long-term unemployment may be sensible, although it is not an easy call."
......... not too "tough" though if one considers the downsides to the unemployed individual and further chilling effect on a comatose economy.
........ as for some?? "not looking hard enough for a job???" When there are dozens, or hundreds of applicants per real or rumored job? So what? If ONE doesn't "try hard enough" (like knee-capping his competitors??) the job gets filled anyway as dozens of others trudge home disappointed at not winning the lottery that day.
"This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States."
........... Ha! WERE there roaring D E M A N D all of those petty issues would be ignored.
Here in AK Shell wants to drill extremely promising oil deposits in the Chukchi Sea..... but drilling under the ice FAR from clean up and support facilities that SHOULD have been in place in the Gulf, thus there is lots of regs, lot's of uncertainties, and I suppose even considerable uncertainty as to whether today's "curious" will be there once they do drill. But we know there is strong, inelastic demand, and Shell, USGS and others are fairly certain of a large supply of oil........ thus billions are being invested over years of planning. Demand is the driver and just now and for some time in the future the US economy just doesn't have it.
Posted by: Jack | 09/12/2011 at 03:25 AM
Tanns; Indeed a "Band-aid" isn't much when bleeding from an artery........ but umm........ what do you suggest?
As you mull your choices try to consider some 20 million families coming up on T-Day and Christmas with no job, unemployment extensions running out, and for many next to NO job prospects for them in this economy, and quite a long time until we transition to the "next" economy, and those trained for a false housing boom, or a vanishing "middle management" are trained for the "new thing" or manage to "retire" partially vested? nothing? and SS? or disability?
Also remember Keynes admonition that "in the long run we're all dead".
Posted by: Jack | 09/12/2011 at 03:30 AM
Mogden? Perhaps you or Boehner have some bright suggestions to lay on us? Thnx! We're a good bit short of great ideas.
Posted by: Jack | 09/12/2011 at 03:31 AM
Mitch -- "Failures?" It IS possible to spend lots of Fed money and NOT gin up economic activity, but it's not likely.
Some expenditures do give us lower "economic multipliers" and one of the worst is military spending "over there". You can see that even though its ungodly expensive to fly oil for Abrams tanks from Texas to Iraq that no one is getting rich when the plane arrives with its own tanks empty and must be refueled for the trip home.
From and economic standpoint Obama is hitting most of the notes. The progressive benefit of cutting payroll taxes immediately puts spendables in the hands of the consumers MOST likely to "go shopping". It is the same for putting construction folk to work. Even were it "make work" projects the dollars would quickly cycle through the economy and keep some pizza shop open, a home unforeclosed, and one less car repo'd or turned back to the "Smart Lease" outfit.
But it's not "make work", we've some $2 trillion of work that needs to be done -- what better time to do it? It being unwise to "go short" on America, we'll eventually come out of this Mess and be far better off with infrastructure repairs and upgrades in our asset column than a pile of cancelled unemployment checks.
But! I, as I'm sure the President is, open to viable ideas. Got any?
Posted by: Jack | 09/12/2011 at 03:46 AM
i've never been too hot on tax cuts as a job-creating stimulus; the theory is that as consumers spend, the increase in demand causes companies to ramp up production & hire more workers...although that might have been the case at one time, i dont think it works too well in our global economy...think about the first stimulus, where everyone was getting that extra $15 dollars each paycheck; typically, most of that weekly stipend was spent at walmart, & hence mostly employed the chinese...
Posted by: rjs | 09/12/2011 at 07:22 AM
- let the corrupt banks fail
- let the governments that have sold themselves to the public unions fail
- declare victory, including in World War 2, and bring the troops home from all foreign nations tomorrow
- delete the corporate and personal income tax and replace with a VAT
That'll do for a start.
Posted by: Mogden | 09/12/2011 at 02:18 PM
What do I suggest? For starters, disband the EPA and unleash the engine of American free enterprise to create jobs for all.
Posted by: TANSTAAFL | 09/12/2011 at 08:42 PM
Mogden: How will bank failures affect investor confidence in the financial markets as a whole and the economy at large? Is the risk of a bank run really what the banks need at this stage? How will the surplus labour from a large influx of former bank employees and veterans affect current unemployment rates? Who will represent the interests of the workers without effective unions? Could a VAT that is high enough to even finance all public goods instead stifle consumption?
Posted by: Cal | 09/12/2011 at 10:02 PM
Teabaggers of the World Unite! Your chances of destroying the Economy of the United States and World has never been greater!
Ahh... The joys of irrationality and unrestrained zeal... ;)
Posted by: NEH | 09/13/2011 at 12:39 PM
Cal:
- how will rewarding incompetence and failure to the extent that the nation teeters on the edge of bankruptcy affect said confidence?
- why do you think taxpayers should overpay greatly for services?
- why is it better to suppress consumption than productive work?
Posted by: Mogden | 09/13/2011 at 12:50 PM
Mogden, So we must descend into the depths of an Economic Abyss in order to save ourselves Economically? Sounds like the doctor who said, "Well, the patient died, but we did cure the disease".
Whew... more solutions like this and we are undone... ;)
Posted by: NEH | 09/13/2011 at 02:16 PM
Prof. Becker says: "This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States." That's absurd. The recovery is slow because demand is low. Demand is low because consumers are afraid to spend because they might have less money or no job in the near future. Stimulate. Stimulate. Stimulate. Yes, adding to the already large deficit is bad. Chemotherapy is bad too. But cancer is worse. So when we have cancer, we do chemotherapy. We can fix the deficit without making the patient sicker when GDP is up and unemployment is down.
Posted by: Tom in Houston | 09/13/2011 at 02:54 PM
Chemotherapy is an inapt analogy. Dr. Obama has prescribed nearly 3 years of ineffective economic policy that has yet to provide even symptomatic relief. At best, his policies are not chemotherapy, but snake oil. At worst, Obama is giving the patient prolonged overdoses of chemotherapy at toxic levels that promise no recovery whatsoever.
Posted by: TANSTAAFL | 09/13/2011 at 08:35 PM
Borrow money, distribute it to consumers, consumers are happy, they spend, producers are happy, they hire more people, politicians are happy that they fixed the economy, basically everyone is happy.
…Yet, it took 2-3 millenia for humanity to figure out this moronic delusional shortcut to prosperity. Amazing! Stimulous no stimulous was the choice and heck humanity always got it wrong. They always chose the misery of non-stimulus. It was just sitting in front of our noses and we failed to notice. Worse actually. Nobody even tried it even by accident and thus this perpetual motion machine of wealth was just sitting there undiscovered. But wait! Here come American voters and after 2-3 millenia they discover … tada!!! Stimulus!!!!
And why really wait until we are in a recession to do it? Why not do it during normal times and get 6,8,10% growth? Bad for the environment?
Dumb Americans think they have discovered the fountain of youth…, a moronically simple central planning trick that has apparently eluded past civilizations for centuries.
I guess the CHANGE didn’t work as HOPED. Did it? Quick do something, anything! Anything but the traditional uniquely successful but humanly unnatural American principle of self-determination and self-reliance.
Posted by: Retta M | 09/14/2011 at 12:47 AM
rjs "employing the Chinese?" Current howling and mythology may make it seem like that, but what do we buy from China? $500 billion out of a $14 trillion economy? 4%? Consider your own spending patterns, or look around the house....... how much is "Chinese" or any other import?
Instead? Why are we, the highly mechanized, 5% of the world's population running a trade deficit with the world? IF..... we "have the best H/C" perhaps we should be exporting it for the benefit of the other 95%. And Ha! in the process learn how to curb costs and do a lot better job of distributing "best medicine" to ourselves.
Walmart, Starbucks, Buick and others take their expertise offshore and "compete" well, are we doing our best at developing our exports? Seems for the most part we build, say, a car for our huge market and let others buy it if they want. By contrast the Japanese gained their market share by designing their cars to suit our huge market and that of other nations, thus Toyota becomes the largest car maker.
I saw this in person once. I was at the bicycle "Expo" in the early 70's during a bike boom. At the time the big names were Raleigh from the UK, Gitane and Peugeot from France. The Japanese were just breaking in. Coming from the steep terrain of Alaska we discussed wider "touring gears" to cope. The Peugeot guy responded with "These are racing bicycles, if they get their legs in shape these gears are fine".
Yah sure....... at a nearby booth a Japanese engineer in halting English asked US what we wanted. You know the rest, they soon had wide 10 speed gearing, better shifters, and today wide 21 speeds are the std and the French and British market share is token.
Shimano spent so much on developing "investment casting" that they nearly lost the company. Campagnolo, at the time made the best racing stuff, but costly as it's cast aluminum that is then machined, all those little screw holes etc. Investment casting produces parts polished and ready to assemble. Shimano now dominates the market by large margins.
Over those years the Brits and others lost the head start they had in bikes, motorcycles and sport/luxury cars. Are we doing the same?
Posted by: Jack | 09/14/2011 at 02:38 AM
I left out Schwinn that had a near monopoly in the US after smaller companies disappeared. They became bankrupt during the boom in "ten speeds" and later, the mountain bike boom. The name exists today but it's a very different company that basically imports.
Posted by: Jack | 09/14/2011 at 02:41 AM
...interesting to read the comments. I would like to see more details about this topic. I'm going to keep coming back here.
Posted by: femmes seules | 09/14/2011 at 04:40 AM
Jack, Schwinn? That used to be a veritable Chicago Company. As we say in Chicago, "Schwinn Bicycles? Today, they're just made in China by the Butterfly Bicycle Co. with a "Schwinn" Label stuck on". The same could be said for Huffy out of Dayton as well...
As for the Brit's, Sturmey Archer didn't keep pace with the new gearing systems and when they finished with Tea Time it was too late... ;)
Ahh... the Race to the Bottom continues...
Posted by: NEH | 09/15/2011 at 04:29 PM
I really appreciate your article, in fact I think you deserve a thumbs up.whyhpIIfBkAwovr
Posted by: cheap moncler jackets | 09/16/2011 at 04:17 AM
thats a very gud article.................
Posted by: AB International | 09/16/2011 at 05:45 AM
NEH, Veritable? You did mean "Venerable" didn't you? You must be a graduate of Mrs. Malaprop's School of Elocution and Rhetoric. ;)
Posted by: NEH | 09/16/2011 at 10:21 AM
Thanks for division this attractive post. There are some points here that I have not hear of earlier than. Perfect!Just keep your work!Once again, thanks for this useful post. This will be very helpful for me.
Posted by: nike shoes | 09/16/2011 at 07:53 PM